WASHINGTON. Predictably, the Democrat-Socialist House of Representatives has decided to go all in on the #Resistance. Committee chairs and associated dementees alike are setting up systems they believe will create a successful drive to impeach President Trump. Meanwhile, in a weird coincidence, and Dems aside, Mr. Market apparently decided over the weekend to mount his own #Resistance against the bulls at or around the 2800 point mark on the broad-based S&P 500 average (non-trading symbol: $SPX).
China trade dispute v Mr. Market’s #Resistance
Despite the financial media’s insistence that Mr. Market will need to see an extremely positive US-China trade agreement soon – or else – it looks like that magic 2800 $SPX level – the technical line of “resistance” based on the Q4 2018 market crash – is the real #Resistance that both Mr. Market and investors are facing right now. The $SPX needs to break above its current line of resistance – that 2800 level more or less – in order to get that bullish excitement re-ignited in the heart of Mr. Market. (More on this in our companion article.)
What about China trade, anyway?
Ah, yes, but we’ll always have China, as CNBC prefers to opine.
“Stocks slipped on Tuesday as investors weighed ongoing trade negotiations between China and the U.S. along with strong earnings from Target.
“The Dow Jones Industrial Average fell 15 points as shares of Walgreens Boots Alliance dipped more than 1 percent. The S&P 500 was down 0.1 percent along with the Nasdaq Composite.
“Secretary of State Mike Pompeo said Monday he thought the two countries were ‘on the cusp’ of reaching a deal that would end the trade skirmish.
“‘We’re trying to get that rectified, get that fixed, make it fair and reciprocal and I think we’re on the cusp of doing that and I hope all those tariffs will go away, all those barriers,’ Pompeo told KCCI television in Des Moines, where he was attending a farmers conference.”
Negotiations in the “final stages”? Investors hope so
“Pompeo’s comments come after sources told CNBC that U.S.-China trade negotiations are in the ‘final stages’ and that a summit in Mar-a-Lago later this month could close the deal.
“U.S. investors have been closely watching negotiations on trade with China as they assess how a deal —or lack thereof — could impact corporate profits.
“However, equities fell on Monday amid worries that a deal was fully priced into the market. The decline pushed the S&P 500 back below the key 2,800 level.”
At least CNBC acknowledged the technical #Resistance argument. We, at least, think it’s more important than China right now to the market’s direction. Yet, realistically, we can’t entirely ignore the potentially significant impact a China agreement – or a China fail – might have upon the currently confused Mr. Market.
On the technical side
CNBC does finally provide a bit more info on the technical argument.
“‘The rally from the 12/26/18 low is among the strongest starts to the year since 1987. The past two months’ straight-line move, however, has seen bearish sentiment fall to its lowest since January 2018, just as the S&P 500 finds resistance at 2,813,’ Julian Emanuel, chief equity and derivative strategist at BTIG, wrote in a note. ‘Monday’s reaction to this overhead level suggests that stocks will likely spend time “Reading Between the Lines” of resistance (2,813) and support (2,750 and 2,600) before heading to BTIG’s year-end price target of 3,000.’”
A technical recap from Stockcharts.com
Over at Stockcharts.com, an excellent technical investing site we subscribe to, Tom Bosley, in his Monday recap, offers a similar viewpoint via the site’s “public” (non-pay) page.
“The U.S. stock market is at a major crossroad right now. Yesterday, the benchmark S&P 500 hit 2816.88, just .06 from the October 17th reaction high at 2816.94. If the sellers were going to show up, the time was at hand.
“Equities sold off hard on Monday morning, with the Dow Jones down 415 points at its intraday low. But, unlike the December selloff, buyers stepped back in, cutting the Dow’s loss in half by the close. The S&P 500 began bouncing before it even tested its rising 20-day EMA [Exponential Moving Average]. The Volatility Index ($VIX), which attempted to close above its 20 day EMA for the first time in 2019, failed miserably into the close. The 8 red arrows on the chart above show failed breakout attempts on the VIX in 2019. In order for the bears to truly regain short-term control of market action, we need to see the S&P 500 close back beneath its rising 20 day EMA. It’s that simple. Technical damage has little chance of sticking until that occurs.”
In other words, “It ain’t over ‘til it’s over.” Bosley seems to think that the bulls are preparing the battlefield for a bullish outcome. They seem determined to overcome the current market #Resistance. (But probably not today.)
Atlas Financial: Boo, hiss
Our own portfolio has mounted its own kind of #Resistance over the last few days, either going up or holding its own no matter what the daily whims of Mr. Market.
To wit: we got a big, nasty portfolio surprise this morning in one of our preferred stock-baby bond positions. Today’s villain is the Atlas Financial Holdings 6.625% senior note (AFHBL), maturing on April 26, 2022. These normally safe (and likely safe in this instance) debt instruments trade like stocks and tend to remain relatively stable in most market conditions.
But the main problem with this one is the company that issued it, Atlas Financial Holdings (AFH), which is, in fact, a fairly broad-based property-casualty insurer. Their horrendous quarterly numbers, just reported, hit the common stock hard Monday.
Still worse, AFH shares were splattered on the pavement today in action that now has this already cheap (in dollars) stock nearly obliterated. As we write this, the shares are valued at about $2.97 per share, which gets them perilously close to penny stock territory ($1 or less). That’s a colossal 66% loss just this year alone.
Why did the Atlas baby bond tank?
Normally, preferred stocks and baby bonds associated with a company that tanks aren’t hugely affected. But with Atlas, its continuing losses seem primarily due to poor insurance loss reserving. In other words, what Atlas has in its payout kitty doesn’t match how much it’s been shelling out on claims.
Which means their back office sucks.
Which is what you don’t want when you invest in an insurance company, since these outfits generally coin money. Because they have to in case of outsized losses in any given year. Looks like Atlas was asleep at the switch. Maybe this company has some kind of built-in #Resistance to making a profit.
At any rate, investors apparently hated this latest earnings report so much that they slaughtered the Atlas baby bonds, too, smashing them for a 27% loss on the day. Thus far. That really clobbered our portfolio. Hell, we buy this kind of investment precisely to avoidthis behavior.
Dealing with an investment that heads South. Do it carefully
Bottom line: This baby bond selloff is likely a knee-jerk reaction to the quarterly report. It will probably clear itself up in a couple of weeks when nervous investors get done with panic selling. AFHBL should eventually recover. Or mostly.
Insurance companies rarely go out of business. Atlas probably won’t. But at this point, it looks like they could use a new CEO. Maybe they could use a new board, too, and/or a back office that knows how to reserve for risk.
We’ll either double up our AFHBL position soon to average down. Or, if we see their overall financing is shaky, we’ll dump the position. Right now it looks like a loser. But with a close maturity at hand (2022), you never know.
At any rate, like any investor, we like to book nice profits. And mount a #Resistance against losses. But sometimes, that doesn’t work out. So we might have to mount our own #Resistance against their baby bonds. Stay tuned.
— Headline image: Public Domain image via Pixabay, CC 0.0 license. Original modified by the author.